PUBLICATIONS

The Diminishing Tip Credit: Another Reason it is becoming Harder to Comply with Wage & Hour Laws in New York

Date Feb 4, 2015

Executive Summary: On January 30, 2015, the New York State Department of Labor's ("NYSDOL") Wage Board (the "Wage Board") voted to recommend a fifty percent increase in the minimum hourly rate for tipped workers, from $5.00 to $7.50 an hour. See: http://labor.ny.gov/pressreleases/2015/january-30-2015.shtm.

Executive Summary: On January 30, 2015, the New York State Department of Labor's ("NYSDOL") Wage Board (the "Wage Board") voted to recommend a fifty percent increase in the minimum hourly rate for tipped workers, from $5.00 to $7.50 an hour. See: http://labor.ny.gov/pressreleases/2015/january-30-2015.shtm.

If the Wage Board's recommendation becomes law (it would go into effect December 31, 2015 if approved by the Commissioner of Labor), the maximum tip allowance that an employer is entitled to take against the minimum wage of its tipped workers in New York will be significantly decreased, from $3.75 per hour to $1.25 per hour. For example, a franchise owner currently is permitted to take a tip credit of $3.75 for a fast food worker making $5.00 hour, because the sum of the tip credit and hourly cash wage equals $8.75 (the state minimum wage rate). However, if the fast food worker's hourly rate increases to $7.50 an hour, the maximum tip allowance the franchise owner will be entitled to take for that worker will be $1.25, not to exceed $8.75 (the state minimum wage rate). This also means that, for a fast food franchisee, the additional wage overhead attributable to one fast food worker working a 40 hour weekly shift will be $100 per week, or $5,200 per year.

Since it is no secret New York Governor Andrew Cuomo assembled the Wage Board last year to review the tip credit's impact on workers' wages, hospitality industry employers (e.g. restaurateurs, including fast food franchise owners, and spa owners and operators) should be prepared for this increase in tipped workers' hourly wage rates to become law by year's end. The Wage Board's tipped workers' wage recommendation coupled with the recent implementation of the amendments to the Wage Theft Prevention Act ("WTPA") means a significant increase in operation overhead for hospitality industry employers as well as increased enforcement pressure from government agencies such as the US Department of Labor ("USDOL"), NYSDOL or the New York State Attorney General's Office ("NYSAG").

On December 29, 2014, Governor Cuomo signed a bill that amended the WTPA. These recent WTPA amendments eliminate the annual wage notice requirement imposed on New York employers, with the exception of employees in the hospitality industry, but simultaneously impose increased penalties and potential successor liability for predecessor companies' labor law violations and as well as personal liability for the ten limited liability company ("LLC") members with the largest ownership share of the LLC. For more information on the WTPA amendments, please see our January 23, 2015 Legal Alert, Amendments to New York's Wage Theft Prevention Act: A Double-Edged Sword for Employers.

Recent trends in wage and hour law implementation and enforcement have heavily favored employees. This is attributable in large part to labor groups, such as the Service Employees International Union (SEIU), which over the last few years have amplified their mobilizing and campaign efforts to pressure law makers to increase the minimum wage. In response to pressure from employee rights groups, the USDOL, NYSDOL, NYSAG, and related agencies have collectively enhanced the monitoring and enforcement of minimum wage for workers across various industries, particularly in the hospitality industry.

It is not just investigations by the USDOL or NYSDOL that employers and, specifically, franchise owners should be wary of. As of late, NYSAG has upped the ante in its wage and hour investigations, utilizing its authority to prosecute business and franchise owners criminally for violating wage and hour laws. For example, on October 2, 2014, New York Attorney General Eric Schneiderman proudly announced the arrest of a small restaurant owner in Port Chester, New York. The employer found herself in handcuffs for $35,000 in unpaid minimum and overtime wages to five employees. The threat of criminal prosecution further complicates things for employers and franchise owners trying to navigate the complex (and often confusing) wage and hour laws and manage the rising labor costs.

The current business and legal landscape for hospitality employers means that compliance review of their wage and hour practices can no longer be delayed. Business operators and owners may face severe consequences for non-compliance, including business closure, personal financial ruin, and possibly even jail time. Hospitality employers, including franchise owners, are strongly recommended to review their record keeping policies and procedures, evaluate their pay practices, and consider implementing a periodic payroll audit protocol in order to ensure compliance with wage and hour laws.

For more detailed information regarding proposed increase in wages for tipped workers and to ensure compliance, please contact the authors of this Alert, Eric Su, esu@fordharrison.com, or Danielle Moss, dmoss@fordharrison.com, both of whom are attorneys in FordHarrison's New York City office. You may also contact the FordHarrison attorney with whom you usually work.